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Appointing a Receiver for California Property in Foreclosure

In today's depressed real estate market, it's the rare real estate or business lawyer who has not had to deal with a real estate secured loan gone bad. However, many are not sufficiently familiar with the circumstances under which the appointment of a receiver is appropriate or even why the appointment of a receiver makes good sense. A receiver is an individual appointed by the court (usually at the request of the foreclosing lender) to act as a neutral third party and pursuant to Code of Civil Procedure Section 566(a), no party may act as a receiver if related to the foreclosure action (including the lawyers for the borrower or lender), the lender or the judge. In addition, the receiver is not an agent of the borrower or lender, but works for the court and is required to do what the court instructs, rather than what the lender or borrower requests. If there is positive cash flow from the property subject to the receivership, the receiver holds the money until either foreclosure by the lender or reinstatement or repayment of the debt by the borrower. Section 564 (a) of the California Code of Civil Procedure provides by way of introduction that a receiver may be appointed in any case where the court is empowered by law to do so. Further, a foreclosing lender can seek the appointment of a receiver one of two ways. Section 564 (b) of the Code of Civil Procedure continues by listing the types of cases in which appointment of a receiver is permitted. For example, Subsection (b)(2) specifies that a receiver may be appointed in any action by a secured lender for foreclosure under a deed of trust where it appears that (i) the property is in danger of being "lost, removed or materially injured" or that the terms of the deed of trust have not been performed or observed, and (ii) the property upon sale would be insufficient to repay the debt. On the other hand, subsection (b)(11) provides quite simply that a receiver may be appointed in an action by a lender for specific performance of an assignment of rents provision in a deed of trust (or in a separate agreement). Since virtually all deeds of trust these days include an assignment of rents provision, it is obvious that the easiest way to get a receiver appointed is in connection with an action for specific performance of the assignment of rents provision ( typically in connection with an action for judicial foreclosure, even if there is no intent to actually foreclose judicially). Otherwise, proceeding under subsection (b)(2) would require a higher standard to be met (i.e., proving that the property is in danger of being injured and that the value of the property is less than the amount of the debt). Consequently, as long as the deed of trust includes an assignment of rents provision, most actions for appointment of a receiver rely on the more reasonable requirements of subsection (b)(11). The appointment of a receiver under Section 564(b)(11) serves a number of purposes for the lender. First, it allows the lender to move possession of the property from the borrower to a neutral third party, the receiver. Second, pursuant to the assignment of rents provision in the deed of trust, it allows the receiver to control cash flow by collecting rents and paying maintenance and related ownership costs of the property. Third and most importantly, it allows the lender to avoid mortgagee in possession status (i.e., if the lender acts like an owner and collects the rents and pays the bills, it is subject to the same liability exposure as the owner and can even be liable to the borrower for negligence and the like). In addition, Section 2938(e)(1) expressly provides that the appointment of a receiver does not make the lender a mortgagee in possession.

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